Question

On January 1, Zeibart Company purchases equipment for $220,000. The equipment has an estimated useful life of 10 years and expected salvage value of $25,000. The company uses straight-line depreciation. Four years later, economic factors cause the fair value of the equipment to decline to $85,000. On this date, Zeibart examines the equipment for impairment and estimates undiscounted expected cash inflows from this equipment of $115,000
(1) Compute the annual depreciation expense relating to this equipment.
(2) Compute the equipment’s net book value at the end of the fourth year.
(3) If the equipment is impaired at the end of the fourth year, compute the impairment loss. (If the equipment is not impaired, enter 0.)
(4) Compute the annual depreciation expense

Answer 1

Answer:

(1) $19,500

(2) $142,000

(3) $27,000

(4) $15,000

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the p/l over the useful life of the asset. It may be computed as

Depreciation = (cost - salvage value)/useful life

Annual depreciation = ($220,000 - $25,000)/10

= $19,500

4 years later

Carrying amount of the equipment

= $220,000 - 4 * $19,500

= $220,000 - $78,000

= $142,000

If the asset is impaired

An asset is said to be impaired when the carrying amount is higher than recoverable amount where the recoverable amount is the higher of the fair value less cost to sell or the value in use of the asset which is the present value of the future expected inflow from the use of the asset.

Value in use = $115,000

Fair value = $85,000

Value in use = $115,000

Impairment loss = $142,000 - $115,000

= $27,000

Remaining number of years is 6

New carrying amount = $115,000

the annual depreciation expense = ($115,000 - $25,000)/6

= $90,000/6

= $15,000